Can California Tax Its Way to Vibrant Streets? CRE Isn’t So Sure

Friday, May 9, 2025

• California dreamin’: California is closer to passing a statewide tax on vacant commercial properties but critics say that it will not work as intended.

• Prime rate: The Fed held rates steady while global central banks start cutting their own rates to spur growth.

• Star crossed: Many real estate organizations oppose EPA cuts that would eliminate the Energy Star program.

• Ground control: New research finds all 28 studied U.S. cities are sinking, with Texas urban areas sinking fastest.

• Multifamily outlook webinar: Join us May 20th to learn how data and tech are helping multifamily leaders adapt to tighter margins and rising renter demands. Sign up

Editor’s Pick

Can California Tax Its Way to Vibrant Streets? CRE Isn’t So Sure

California is inching closer to enacting the nation’s most sweeping commercial vacancy tax, and the real estate industry is sounding the alarm. The proposed Senate Bill 789 would levy a $5-per-square-foot annual tax on commercial properties left empty for more than six months. If passed, it would be the nation’s first statewide commercial vacancy tax aiming to crack down on blight and generate funds to address housing and homelessness.

Supporters frame the bill as a tool to revive communities and unlock dormant storefronts. But landlords, brokers, and developers see it as a blunt instrument likely to backfire. Critics say the bill misunderstands the time, complexity, and capital required to fill retail or office spaces, particularly in California’s heavily regulated cities.

The industry points to San Francisco as a cautionary tale. The city’s local vacancy tax, passed in 2020, failed to reduce the glut of empty storefronts. Compliance has been spotty and critics say the tax burden, touted initially as a solution, has only added pressure in an already fragile market. A related empty homes tax was declared unconstitutional and is now in legal limbo.

At the state level, SB 789 exempts properties under renovation or delayed by permitting, but landlords argue the exemptions are too narrow. Leasing a commercial space isn’t like flipping a rental apartment. It often requires months of marketing, tenant improvements, permitting, and negotiations, costing hundreds of thousands of dollars. Critics say the policy sends an even more troubling signal to capital markets. Piling on new taxes could spook already hesitant investors in a state known for high costs and dense regulation. 

Meanwhile, San Francisco is still searching for solutions for empty storefronts. Market Street Reimagined, a new design competition, offers $100,000 in prizes for ideas to revive its struggling commercial core. It’s a sign that at least some policymakers hope innovation can succeed where taxation has stalled.

Essential Metrics

While the Fed Holds Steady Central Banks Abroad Are Easing Rates

This week, the Federal Reserve decided to keep the Federal Funds rate steady as it works toward its goals of maximum employment and 2 percent inflation over the long term. While unemployment has stabilized, officials warned that uncertainty remains around both inflation and job data. The committee has set a target range of 4.25 to 4.5 percent but said it needs more data to evaluate the shifting economic outlook.

One word not mentioned in the official Fed statement was tariffs. Fed Chair Powell did mention it in his remarks. “If the large increases in tariffs that have been announced are sustained, they're likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment," he said.

There has been a public rift between the Federal Reserve and Trump administration. Trump has made statements that the Fed should lower rates and called Powell a "fool" on social media after the announcement.

Other countries have started rolling back interest rates. The Bank of England reduced its base rate by 0.25%, following the Bank of Mexico, the Bank of Canada, and the Swiss National Bank, which have all cut rates in the past few months.

The real estate industry has been hoping for rate cuts since the sharp increases in 2022. While the Fed didn’t lower rates as many borrowers and investors had hoped, it did provide more clarity on future policy, easing some of the uncertainty that followed the tariff announcements. Mortgage applications have been rising. As Sam Khater, Freddie Mac’s chief economist, explained, "at this time last year, the 30-year fixed-rate mortgage was 30 basis points higher and purchase applications were declining. Today, rates are lower and have remained stable for weeks, sparking continued increases in purchase applications."

Overheard

Sinking Land Is Putting More Texas Buildings in Jeopardy

New research published in Nature finds that subsidence—land sinking due to natural and human-caused factors—impacted all 28 U.S. cities examined, with Texas urban centers sinking the fastest. Using radar satellite data, researchers identified that in most of these cities, more than 65% of the land is affected. Houston leads the pack, sinking over 5 millimeters annually.

Subsidence increases the risk of flooding and structural damage, and Texas cities rank highest in building vulnerability. Of the 29,000 buildings labeled “high” or “very high” risk, four out of five of the most affected cities are in Texas. The culprits are groundwater pumping and oil and gas extraction, which compress porous rock layers, along with the region’s natural geology.

Solutions exist, such as managed aquifer recharge programs like those in Orange County and Australia or infrastructure elevation efforts like Osaka’s Kansai Airport. But the clock is ticking. How cities respond may determine the long-term viability of their built environments.

Real Estate Industry Rallies to Defend Energy Star Program

Much of the commercial real estate industry is pushing back against the Trump administration’s proposal to eliminate the Energy Star program through a 55% cut to the EPA’s budget. Groups like The Real Estate Roundtable and major firms such as BXP and AvalonBay say the program is essential for benchmarking building performance, guiding capital investment, and meeting climate reporting mandates. Over 465,000 buildings nationwide utilize Energy Star’s Portfolio Manager to help improve efficiency and lower costs.

Supporters warn that eliminating the program would disrupt established best practices across the industry. But critics counter that, despite its benefits, Energy Star represents a government role better suited for the private sector. They argue that cutting it may not save much money, but it would help reduce federal overreach.

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